Reading the official documents from the June 28 summit requires linguistic and divination skills. The texts are convoluted and clearly aim at giving various positive impressions while shying away from deep commitments.

The clearest result is that EFSF/ESM funds can be used directly to support banks.

The summit attendees seem to have successfully drawn the conclusions that this was necessary from the disastrous impact of their mid-June decision on new lending Spanish authorities to shore up their banks.
...
At the end of the day, the summit was a little move in the right direction bank supervision, but keep watching; we still don’t know what will actually get put in place. There was nothing on collapsing Greece, nothing on unsustainable public debts in several countries, and no end in sight to recession in an increasing number of countries.

There was no knock-out winner in this summit, but on points I’d have to say that the winner is the crisis.

The main substantive thing was the agreement in principle to set up something more or less like a European version of the TARP, in which funds for bank recapitalization will be supplied by a consortium rather than lent to governments already overburdened with debt. Good move, and Irish bond buyers are especially happy. But even this doesn’t take effect right away.

Also some bond purchases, but not by the ECB, so limited in size. So think of this as a very small version of quantitative easing.

So what we know even for the US is that the TARP and QE were perhaps enough to forestall disaster, but not to produce recovery — and Europe has the additional problem of huge needed realignments in competitiveness, which would be much easier if the ECB announced a dramatic loosening — which is didn’t.

Not nearly enough, then. Yet markets were buoyed.

I guess you can argue that this was sort of a downpayment — that it is the harbinger of bigger policy changes to come. I hope so.

The key report for this week will be the June employment report to be released on Friday, July 6th. Other key reports include the ISM manufacturing index on Monday, vehicle sales on Tuesday, and the ISM non-manufacturing (service) index on Thursday.

The European Central Bank (ECB) holds a meeting on Thursday and is expected to cut the benchmark interest rate from 1.0% to 0.75%.

Happy Independence Day on Wednesday!

Reis will release their Q2 Office, Mall and Apartment vacancy rate reports this week. Last quarter Reis reported falling vacancy rates for apartments, a decline in vacancy rates for regional malls, and a slight decline in the office vacancy rate.

----- Monday, July 2nd -----

10:00 AM ET: ISM Manufacturing Index for June.

Here is a long term graph of the ISM manufacturing index. The consensus is for a decrease to 52.0 from 53.5 in May.

10:00 AM: Construction Spending for May. The consensus is for a 0.2% increase in construction spending.

----- Tuesday, July 3rd -----

Early: Reis Q2 2012 Office vacancy rates.

All day: Light vehicle sales for June. Light vehicle sales are expected to increase to 13.9 million from 13.8 million in May (Seasonally Adjusted Annual Rate).

This graph shows light vehicle sales since the BEA started keeping data in 1967. The dashed line is the May sales rate.

8:15 AM: The ADP Employment Report for June. This report is for private payrolls only (no government). The consensus is for 95,000 payroll jobs added in June, down from the 133,000 reported last month.

8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for claims to be unchanged at 386 thousand.

The top economic story last week was the eurozone deal. From the Financial Times:

The agreement will result in EU bailout funds eventually being injected directly into teetering Spanish financial institutions, meaning Madrid can sweep the burden of the bailouts off its sovereign books.

However, the rescue for Spain’s banks will only come after the creation of a single banking supervisor to be run by the European Central Bank.

The summit agreement also contained some concessions for Italy ... setting the stage for Rome to become the sixth eurozone country to request EU assistance ...excerpt with permission

As always, beware of the details!

In the US, housing continues to improves, however manufacturing was soft in June - and consumer spending was flat in May. For housing, new home sales were up solidly, and house prices - as reported by Case-Shiller - increased in April. Also the Pending Home sales index increased 5.9% in May.

Here is a summary of last week in graphs:

• New Home Sales increased in May to 369,000 Annual Rate

Click on graph for larger image in graph gallery.

The Census Bureau reports New Home Sales in May were at a seasonally adjusted annual rate (SAAR) of 369 thousand. This was up from 343 thousand SAAR in April. Sales in February and March were revised up.

The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate.

"A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in nonpermit areas and a sales contract has not been signed nor a deposit accepted."

Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed.

This graph shows the three categories of inventory starting in 1973.

The inventory of completed homes for sale was at a record low 43,000 units in May. The combined total of completed and under construction is at the lowest level since this series started.

New home sales have averaged 353 thousand SAAR over the first 5 months of 2012, after averaging under 300 thousand for the previous 18 months. All of the recent revisions have been up too. This was a very solid report and above the consensus forecast.

S&P/Case-Shiller released the monthly Home Price Indices for April (a 3 month average of February, March and April).

This first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 33.3% from the peak, and up 0.7% in April (SA). The Composite 10 is up from the post bubble low set in March, Not Seasonally Adjusted (NSA).

The Composite 20 index is off 33.0% from the peak, and up 0.7% (SA) in April. The Composite 20 is also up from the post-bubble low set in March (NSA).

The second graph shows the Year over year change in both indices.

The Composite 10 SA is down 2.2% compared to April 2011.

The Composite 20 SA is down 1.9% compared to April 2011. This was a smaller year-over-year decline for both indexes than in March.

The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Prices increased (SA) in 17 of the 20 Case-Shiller cities in April seasonally adjusted (18 cities increased NSA). Prices in Las Vegas are off 61.1% from the peak, and prices in Dallas only off 6.2% from the peak. Note that the red column (cumulative decline through April 2012) is the lowest for only a couple of cities.

This was better than the consensus forecast, and the NSA indexes are above the post-bubble lows set last month (NSA).

Case-Shiller, CoreLogic and others report nominal house prices, and it is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio. Below are three graphs showing nominal prices (as reported), real prices and a price-to-rent ratio. Real prices, and the price-to-rent ratio, are back to late 1998 and early 2000 levels depending on the index.

In nominal terms, the Case-Shiller National index (SA) is back to Q4 2002 levels, and even with the recent small increase, the Case-Shiller Composite 20 Index (SA) is back to March 2003 levels, and the CoreLogic index (NSA) is back to May 2003.

The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to Q4 1998 levels, the Composite 20 index is back to March 2000, and the CoreLogic index back to February 2000.

As we've discussed before, in real terms, all of the appreciation in the '00s is gone.

This graph shows a price to rent ratio using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to Q4 1998 levels, the Composite 20 index is back to March 2000 levels, and the CoreLogic index is back to April 2000.

In real terms - and as a price-to-rent ratio - prices are mostly back to late 1990s or early 2000 levels.

The BEA released the Personal Income and Outlays report for May.
This graph shows real PCE by month for the last few years. The dashed red lines are the quarterly levels for real PCE. You can really see the slow down in Q2 of last year.

Using the two-month method, it appears real PCE will increase around 1.4% in Q2 (PCE is the largest component of GDP); the mid-month method suggests an increase of less than 1% in Q2. Also - so far - it appears spending is soft in June, so Q2 PCE growth will probably be fairly weak.

Another key point is the PCE price index has only increased 1.5% over the last year, and core PCE is up 1.8%. And it looks like the year-over-year increases will decline further in June.

In the week ending June 23, the advance figure for seasonally adjusted initial claims was 386,000, a decrease of 6,000 from the previous week's revised figure of 392,000. The 4-week moving average was 386,750, a decrease of 750 from the previous week's revised average of 387,500.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims declined slightly to 386,750.

Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

The New York and Philly Fed surveys are averaged together (dashed green, through June), and five Fed surveys are averaged (blue, through June) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through May (right axis).

The ISM index for June will be released Monday, July 2nd, and these surveys suggest some decrease from the 53.5 reading in May.

The Unofficial Problem Bank List finished the first half of 2012 with 917 institutions with assets of $354.6 billion. A year ago, the list held 1,003 institutions with assets of $419.9 billion, which was the peak level in terms of assets. Net change for the month was a decline of 14 institutions and $3.4 billion of assets.

The additions include Putnam Bank, Putnam, CT ($450 million Ticker: PSBH) and First Bank of Miami, Coral Gables, FL ($248 million). The other change is the FDIC issuing a Prompt Corrective Action order against McHenry Savings Bank, McHenry, IL ($262 million).

With the passage of the calendar quarter, it is time to update the transition matrix. As seen in the table, there have been a total of 1,552 institutions with assets of $802.2 billion that have appeared on the list. About 41 percent or 635 institutions with assets of $369.4 billion have been removed from the list. Failure has been the prior manner of exodus as 330 institutions with assets of $286.0 billion have failed since appearing on the list. Since the list first appeared on August 7, 2009, 31 institutions have failed without being on the unofficial list. Removals from unassisted mergers and voluntary liquidations total 106 institutions.

Actions have been terminated against 199 institutions with assets of $93.5 billion. During the quarter, there was an acceleration in action terminations, particularly within the pool of institutions added after publication of the original list. This group had 44 terminations compared with six terminations in the original pool. Overall, 5.3 percent of the 948 institutions on the list at the start of the second quarter were removed because of action termination. For comparison purposes, the action termination rate was 3.3 percent in the first quarter of 2012 and 2.2 percent in the fourth quarter of 2011. Some cynical observers would say the acceleration in the termination rate results from industry outcry and Congressional pressure on the banking regulators. The difference in the termination rates among the pools may provide some insights as to vintage severity. In other words, were the early arrivers on the list in worse condition than the late comers?

Unofficial Problem Bank List

Change Summary

Number of Institutions

Assets ($Thousands)

Start (8/7/2009)

389

276,313,429

&nbsp

Subtractions

Action Terminated

71

(20,287,691)

Unassisted Merger

21

(3,538,086)

Voluntary Liquidation

2

(4,855,164)

Failures

144

(181,206,086)

Asset Change

(14,743,502)

&nbsp

Still on List at 6/30/2012

145

51,682,900

&nbsp

Additions

772

302,966,255

&nbsp

End (6/30/2012)

917

354,649,155

&nbsp

Intraperiod Deletions1

Action Terminated

122

73,210,715

Unassisted Merger

78

43,642,243

Voluntary Liquidation

5

1,259,188

Failures

186

104,832,833

Total

391

222,944,979

1Institutions not on 8/7/2009 or 6/30/2012 list but appeared on a list between these dates.

Fannie Mae reported that the Single-Family Serious Delinquency rate declined in May to 3.57% from 3.63% April. The serious delinquency rate is down from 4.14% in May last year, and this is the lowest level since April 2009.

The Fannie Mae serious delinquency rate peaked in February 2010 at 5.59%.

Freddie Mac reported that the Single-Family serious delinquency rate declined slightly in May to 3.50%, from 3.51% in April. Freddie's rate is only down from 3.53% in May 2011. Freddie's serious delinquency rate peaked in February 2010 at 4.20%.

These are loans that are "three monthly payments or more past due or in foreclosure".

Click on graph for larger image

I don't know why Fannie's delinquency rate is falling faster than for Freddie.

The "normal" serious delinquency rate is under 1%, so there is a long way to go.

The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 101.4 in May, down 0.2 percent from April’s level of 101.6. Despite the decline, May represented the seventh consecutive month that the RPI stood above 100, which signifies expansion in the index of key industry indicators.

“Despite a soft patch in the overall economy, restaurant operators reported positive same-store sales for the 12th consecutive month,” said Hudson Riehle, senior vice president of the Research and Knowledge Group for the Association. “Looking forward, restaurant operators remain generally optimistic about sales growth in the months ahead, though they are somewhat less bullish about the direction of the economy.”

CoreLogic ... today released its National Foreclosure Report for May, which provides monthly data on completed foreclosures and the overall foreclosure inventory. According to the report, there were 63,000 completed foreclosures in the U.S. in May 2012 compared to 77,000 in May 2011 and 62,000 in April 2012. Since the financial crisis began in September 2008, there have been approximately 3.6 million completed foreclosures across the country. Completed foreclosures are an indication of the total number of homes actually lost to foreclosure.

Approximately 1.4 million homes, or 3.4 percent of all homes with a mortgage, were in the national foreclosure inventory as of May 2012 compared to 1.5 million, or 3.5 percent, in May 2011 and 1.4 million, or 3.4 percent, in April 2012.

“There were more than 819,000 completed foreclosures over the past year, or an average of 2,440 completed foreclosures every day over the last 12 months,” said Mark Fleming, chief economist for CoreLogic. “Although the level of completed foreclosures remains high, it is down 27 percent from a peak of 1.1 million in all of 2010.”
...
“Though the national foreclosure inventory levels remain steady, around 1.4 million homes, there have been dramatic shifts at the state level,” said Anand Nallathambi, president and CEO of CoreLogic. “Nevada, Arizona and Michigan, for example, each experienced at least a 20-percent decline in the foreclosure inventory from a year ago. While foreclosure inventories in most states are declining, the foreclosure inventory is still rising in many judicial states, such as Hawaii, New York and Connecticut.”

So far we haven't seen a surge in completed foreclosures - or a large increase in REO (lender Real Estate Owned) coming on the market. Note: The foreclosure inventory reported by CoreLogic is lower than the number reported by LPS of 4.12% of mortgages or 2 million in foreclosure, and the Mortgage Bankers Association’s (MBA) Q1 report showing 4.39% of loans in the foreclosure process.

My guess is the "surge" in foreclosures this year will be less than many people expect, although there has been an increase in some judicial states.

Chicago PMI: The overall index increased to 52.9 in June, up from 52.7 in May. This was slightly below consensus expectations of 53.1 and indicates slow growth in June. Note: any number above 50 shows expansion. From the Chicago ISM:

The Chicago Purchasing Managers reported the June Chicago Business Barometer stabilized just above May's 33 month low. The short-term trend of the Chicago Business Barometer fell for the third month. The three-month moving average of each Business Activity index, except Employment, fell in June.
...
• PRODUCTION rebounded;
• NEW ORDERS and ORDER BACKLOGS lowest since September 2009;
• PRICES PAID were at a 30 month low.

New orders declined to 51.9 from 52.9, and employment increased to 60.4 from 57.0.

Click on graph for larger image.

The final Reuters / University of Michigan consumer sentiment index for June declined to 73.2, down from the May reading of 79.3, and the preliminary June reading of 74.1.

This was below the consensus forecast of 74.1 and the lowest level this year. Overall sentiment is still weak - and apparently the weak job market and sluggish economy are outweighing any positive impact from falling gasoline prices.

Personal income increased $25.4 billion, or 0.2 percent ... in May, according to the Bureau of Economic Analysis. Personal consumption expenditures (PCE) decreased $4.7 billion, or less than 0.1 percent.
...
Real PCE -- PCE adjusted to remove price changes -- increased 0.1 percent in May, the same increase as in April. ... PCE price index -- The price index for PCE decreased 0.2 percent in May, compared with an increase of less than 0.1 percent in April. The PCE price index, excluding food and energy, increased 0.1 percent in May, the same increase as in April.

The following graph shows real Personal Consumption Expenditures (PCE) through May (2005 dollars). Note that the y-axis doesn't start at zero to better show the change.

Click on graph for larger image.

This graph shows real PCE by month for the last few years. The dashed red lines are the quarterly levels for real PCE. You can really see the slow down in Q2 of last year.

Using the two-month method, it appears real PCE will increase around 1.4% in Q2 (PCE is the largest component of GDP); the mid-month method suggests an increase of less than 1% in Q2. Also - so far - it appears spending is soft in June, so Q2 PCE growth will probably be fairly weak.

Another key point is the PCE price index has only increased 1.5% over the last year, and core PCE is up 1.8%. And it looks like the year-over-year increases will decline further in June.

Thursday, June 28, 2012

The focus tomorrow will be on the end of the two day European summit in Brussels. There will probably be some sort of agreement on a "growth pact". The Financial Times is live blogging the European summit: EU summit: Live blog

The company said on Thursday that its total international losses would triple in the second quarter, with Europe accounting for the most of the loss. Ford lost $190 million in the first quarter in its international operations ...

The company’s chief financial officer, Robert Shanks, said in an interview that conditions in Europe were “getting tougher,” as manufacturers stepped up discounts to jump-start sales, which are at their lowest level in more than a decade.

On Friday:
• At 8:30 AM ET, The Personal Income and Outlays report for May will be released. The consensus is for a 0.3% increase in personal income in May, and for no change in personal spending. And for the Core PCE price index to increase 0.2%. Note: Q1 PCE was revised down slightly in the third estimate of GDP released this morning.

• At 9:45 AM, The Chicago Purchasing Managers Index for June. The consensus is for an increase to 53.1, up from 52.7 in May.

• At 9:55 AM, The final June Reuter's/University of Michigan's Consumer sentiment index will be released. The consensus is for no change from the preliminary reading of 74.1.

Van Rompuy says no agreement yet on growth pact because they haven’t finished discussing all the chapters yet. He would not confirm it was being blocked by either Mario Monti or David Cameron; it was simply unfinished. He said two countries were most concerned to see agreement on both long and short term together – he didn’t name them, but Germany and Italy are the most likely suspects. Both inclined to say no agreement until it is all agreed.excerpt with permission

• September 21, 2011: "Operation Twist" announced. "The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less."

• June 20, 2012: "Operation Twist" extended. "The Committee also decided to continue through the end of the year its program to extend the average maturity of its holdings of securities."

Growth in Tenth District manufacturing activity slowed in June, and expectations eased as producers grew more uncertain.. ...

The month-over-month composite index was 3 in June, down from 9 in May and equal to 3 in April ... The production index eased from 17 to 12, and the new orders index fell back into negative territory after rising slightly last month. Order backlogs continued to ease. The employment index moved lower but remained positive, while the new orders for exports index decreased.

Price indexes moderated for the second straight month, including an actual decline in monthly selling prices. The month-over-month finished goods price index dropped from 0 to -4, its lowest level since mid-2010, and the raw materials price index also decreased.

Here is a graph comparing the regional Fed surveys and the ISM manufacturing index:

Click on graph for larger image.

The New York and Philly Fed surveys are averaged together (dashed green, through June), and five Fed surveys are averaged (blue, through June) including New York, Philly, Richmond, Dallas and Kansas City. The Institute for Supply Management (ISM) PMI (red) is through May (right axis).

The ISM index for June will be released Monday, July 2nd, and these surveys suggest some decrease from the 53.5 reading in May.

In the week ending June 23, the advance figure for seasonally adjusted initial claims was 386,000, a decrease of 6,000 from the previous week's revised figure of 392,000. The 4-week moving average was 386,750, a decrease of 750 from the previous week's revised average of 387,500.

The previous week was revised up from 387,000 to 392,000.

The following graph shows the 4-week moving average of weekly claims since January 2000.

Click on graph for larger image.

The dashed line on the graph is the current 4-week average. The four-week average of weekly unemployment claims declined slightly to 386,750.

This is just off the high for the year.

And here is a long term graph of weekly claims:

This was near the consensus forecast of 385,000 and suggests some renewed weakness in the labor market.

Wednesday, June 27, 2012

The focus tomorrow will be on the start of the two day European summit in Brussels, and also on the SCOTUS ruling on the health care law. The ruling on the Affordable Care Act is expected a little after 10 AM ET. (the SCOTUSblog is a good resource).

On Thursday:
• At 8:30 AM ET, The initial weekly unemployment claims report will be released. The consensus is for claims to decline to 385 thousand from 387 thousand last week.

• Also at 8:30 AM, the third estimate of Q1 GDP will be released. The consensus is that real GDP increased 1.9% annualized in Q1; no change from the 2nd estimate.

• At 11:00 AM, the Kansas City Fed regional Manufacturing Survey for June will be released this is the last of the regional Fed surveys for June, and three out of four have been below expectations. The consensus is for a decrease to 4 from 9 in May (above zero is expansion).

The following graph shows the number of cities with increasing house prices on a year-over-year and month-over-month basis.

This graph is based on the Case-Shiller Composite 20 cities using seasonally adjusted data starting in January 2001.

Most cities were seeing month-over-month increases every month through 2005. In 2006, some cities started seeing year-over-year declines (red). There were still a few cities with increasing prices in early 2007. The increases in 2009 and 2010 were related to the housing tax credit (all of those gains and more are gone).

Recently prices have started increasing in more and more cities. Note: Case-Shiller data is through April.

Lennar Corporation, the 3rd largest US home builder in 2011, reported that net home orders in the quarter ended May 31, 2012 totaled 4,481, up 39.9% from the comparable quarter of last year. The company’s sales cancellation rate, expressed as a % of gross orders, was 16% last quarter, down from 17% a year ago. Home deliveries last quarter totaled 3,222, up 20.1% from the comparable quarter last year. Lennar’s order backlog at the end of May was 3,970, up 60.7% from last May.

As with most other builders, Lennar reported that “pricing trends” were positive in “most” markets last quarter. Here are some comments by CEO Stuart Miller in the press release.

"Evidence from the field suggests that the 'for sale' housing market has, in fact, bottomed and that we have commenced a slow and steady recovery process. And while the housing downturn was broad-based and national, the recovery process continues to be very localized. Although highly conservative mortgage lending practices and challenging appraisals remain a constant headwind, we are experiencing net positive price and volume trends in most of our markets."

Mr. Miller continued, "As the overall housing market has continued to improve over the last several quarters, our well located communities and product execution has allowed us to outperform the market. During the quarter, deliveries increased 20%, new orders increased 40%, backlog increased 61% and our operating margin increased over 100% to 9.2%, our highest margin percentage since Q2 2006. This operating leverage was driven by our ability to increase sales per community, raise prices and lower incentives, and control our overhead costs."

Lennar’s results easily beat “consensus.”

CR Note: It helps to watch the builders. In early May, Tom Lawler sent me a chart on homebuilder sales, and Tom argued we'd see upward revisions to new home sales:

"[R]ight now I estimate that revisions will lift Census’s estimates of new SF home sales last quarter from an average seasonally adjusted annual rate of 337,000 to a SAAR of 350,000."

Sure enough, the Commerce Department has revised up Q1 new home sales to an average of just over 350,000.

Tom adds another key point today:

While the new home sales report exceeded “consensus,” recent numbers might even have been stronger if builders on average had higher inventories for sale. After being burned several times with some “false” signs of recovery, most builders have been pretty conservative in both “spec” building and community-count growth.

Though I'm a country singer, I also love surf-style music. The only thing wrong with the genre is that these songs are always -- of course -- about surfing, as well as teenage romance and drag races. There should be more on macro-economic topics and political economy. So I'd like to do another one like 'Fiscal Cliff,' but I'm out of ideas. I'm hoping NewsHour audience might help. I have in mind a song contest. Submit a topic, a key phrase, or a whole lyric. Whatever you like.

In the Pending Home Sales report this morning, the NAR analysts noted:

Low inventory results partly from underwater homeowners who are unwilling to list their homes, which would require a lengthy short sale process, or additional cash to complete the transaction. NAR estimates 85 percent of homeowners have positive equity, with 15 percent in an underwater situation.

What markets like Miami and Phoenix may now be showing us is that negative equity has another very powerful effect on the supply side beyond increasing the flow of foreclosed homes onto the market: all the households that we predicted would be trapped in their homes and unable to buy new ones are similarly unable to sell their current homes, severely decreasing the overall supply of homes on the market.
...
And negative equity may well be so constraining the supply side of the housing market that it’s creating acute inventory shortages that are bidding up prices.
...
What does all of this imply for the housing bottom? Our emerging hypothesis is that, instead of a long, flat bottom with price appreciation constrained by weak demand and elevated foreclosures, we might end up in an environment in which constrained supply (due to negative equity), together with robust demand from investors and first-time home buyers (not weighed down by negative equity), combine to create cycles of home value spikes followed by cooling periods. These cooling periods are created once local home values have risen enough to free some homeowners from negative equity at which point some of these resurfacing homeowners attempt to sell their homes, thus creating additional supply which tempers price appreciation.

CR comment: Negative equity is probably contributing to the lower levels of inventory, but I think there are other factors too.

One key is the substantial increase in investor owned single family homes. These are not "flippers", but cash flow investors - and these investors will not sell just because prices have risen a few percent (I've talked with some of these investors, and they many are making 8% to 12% cash-on-cash after expenses - and they have no intention of selling in the near term). Economist Tom Lawler discussed this back in February, and concluded that a significant "share of the decline in the share of homes for sale reflects the acquisition of SF (and condo) properties by investors as multi-year rental properties".

Another key driver of lower inventory is price expectations. As I noted: "When the expectation is that prices will fall further, marginal sellers will try to sell their homes immediately. And marginal buyers will decide to wait for a lower price. This leads to more inventory on the market. But when the expectation is that prices are stabilizing (the current situation), sellers will wait until it is convenient to sell."

So there are several factors pushing down inventory - and it looks like inventory was flat or declined in June too. The recent NAR report was for May; below are some numbers for June, and it is possible inventory has already peaked for the year.

According to the deptofnumbers.com for (54 metro areas), inventory is off 22.0% compared to June 2011. Unfortunately the deptofnumbers only started tracking inventory in April 2006.

This graph shows the NAR estimate of existing home inventory through May (left axis) and the HousingTracker data for the 54 metro areas through June.

Click on graph for larger image.

Since the NAR released their revisions for sales and inventory, the NAR and HousingTracker inventory numbers have tracked pretty well.

On a seasonal basis, housing inventory usually bottoms in December and January and then starts to increase again through the summer. So inventory still might increase a little over the next couple of months, but the forecasts for a "surge" in inventory this summer were clearly incorrect. It is even possible that inventory has already peaked for the year.

The second graph shows the year-over-year change in inventory for both the NAR and HousingTracker.

HousingTracker reported that the June listings, for the 54 metro areas, declined 22.0% from the same month last year. So far in 2012, there has only been a small seasonal increase in inventory.

The Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 5.9 percent to 101.1 in May from 95.5 in April and is 13.3 percent above May 2011 when it was 89.2. The data reflect contracts but not closings.

The index also reached 101.1 in March, which is the highest level since April 2010 when buyers were rushing to beat the deadline for the home buyer tax credit.

The PHSI in the Northeast increased 4.8 percent to 82.9 in May and is 19.8 percent above May 2011. In the Midwest the index rose 6.3 percent to 98.9 in May and is 22.1 percent higher than a year ago. Pending home sales in the South increased 1.1 percent to an index of 106.9 in May and are 11.9 percent above May 2011. In the West the index jumped 14.5 percent in May to 108.7 and is 4.8 percent stronger than a year ago.

This was above the consensus of a 1.2% increase for this index.

Contract signings usually lead sales by about 45 to 60 days, so this is for sales in June and July.

“Refinance volume fell last week due largely to a fall-off in refinance applications for government loans, which had more than doubled the prior week,” said Michael Fratantoni, MBA’s Vice President of Research and Economics. “The large swings in activity were due to the implementation of FHA’s new premiums on streamline refinances, and borrowers timing their applications to lower their premiums.”

Refinance activity has been increasing, and the decline this week followed the surge in FHA streamline refinancing last week. With mortgage rates near record lows, refinance activity will probably stay fairly strong.

Two days before a crucial European Union summit, European Council President Herman Van Rompuy released a seven-page report on closer fiscal and banking union envisaging a euro zone treasury that would issue common debt in the medium term.

Merkel immediately stamped on the idea of mutualising debt - favored by France, Italy and Spain - at a meeting of lawmakers from her Free Democratic coalition partners in Berlin, according to people who attended the closed-door session.

"I don't see total debt liability as long as I live," she was quoted as saying, a day after branding the idea of euro bonds "economically wrong and counterproductive".

Mario Monti has set the stage for a tough fight with Germany at the EU summit this week, insisting that he will continue to push Italy’s proposal to use eurozone bailout funds in an attempt to stabilise financial markets.Excerpt with permission

I don't expect much from this summit except an extension for Greece. I'm keeping an eye on Europe, but not watching too closely!

Manufacturing activity in the central Atlantic region softened in June, following six months of moderate expansion, according to the Richmond Fed's latest survey.

In June, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — lost seven points to −3 from May's reading of 4. Among the index's components, shipments declined two points to −2, new orders dropped thirteen points to end at −12, and the jobs index moved down eight points to 8.

Three out of four regional manufacturing surveys have been below expectations in June.

The Conference Board Consumer Confidence Index®, which had declined in May, fell further in June. The Index now stands at 62.0 (1985=100), down from 64.4 in May. The Expectations Index declined to 72.3 from 77.3. The Present Situation Index, however, increased to 46.6 from 44.9 last month.

This was below expectations of a decline to 63.5. It seems the only "good news" these days is from housing!

"This time next year, there could be a 10% price appreciation. I would not be surprised to see that,” [National Association of Realtors Chief Economist Lawrence] Yun said.

It is one thing for prices to stop falling - and maybe increase a little over the next year. But, in addition to the large number of homes in the foreclosure pipeline, there are also many people waiting for a "better market" to sell - and I suspect the slightest appreciation will bring more inventory to market. A 10% increase over the next year? Well, three words: Not. Gonna. Happen.

It wasn’t hard to see this coming: Home prices rose in April after a spring that bought more buyers chasing fewer homes.

Yes, this was pretty easy to see coming. A key question is: Did nominal house prices bottom in March or will there be further price declines?

I think it is likely that prices have bottomed, although I expect prices to be choppy going forward - and I expect any nominal price increase over the next year or two to be small.

I've seen some forecasts of additional 20% price declines on the repeat sales indexes. Three words: Not. Gonna. Happen.

Others, like Barry Ritholtz at the Big Picture, have argued that we could see an additional 10% price decline in the Case-Shiller indexes. I think that is unlikely, but not impossible. The argument for further price declines is that there are still a large number of distressed properties in the foreclosure pipeline - and that there are over 10 million property owners with negative equity, and that could lead to even more distressed sales. So even though prices are pretty much back to "normal" based on real prices and price-to-rent ratio (see below), the argument is that all of these distressed sales could push prices down further. Also, Barry argues that prices following a bubble usually "overshoot".

Those are solid arguments, but I think that some of the policy initiatives (refinance programs, emphasis on modifications, REO-to-rental and more) will lessen the downward pressure from distressed sales - and I also think any "overshoot" will be in real terms (inflation adjusted) as opposed to nominal terms. It is probably correct that any increase in house prices will lead to more inventory (sellers waiting for a "better market"), but that is an argument for why prices will not increase - as opposed to an argument for further price declines.

My view is prices will be up slightly year-over-year next March (when prices usually bottom seasonally for the repeat sales indexes). Some analysts see a small decrease (like 1% to 2%) over the next 12 months, but that isn't much different than a small increase (when compared to forecasts of 10% or 20% declines).

And here is another update a few graphs: Case-Shiller, CoreLogic and others report nominal house prices, and it is also useful to look at house prices in real terms (adjusted for inflation) and as a price-to-rent ratio. Below are three graphs showing nominal prices (as reported), real prices and a price-to-rent ratio. Real prices, and the price-to-rent ratio, are back to late 1998 and early 2000 levels depending on the index.

Nominal House Prices

Click on graph for larger image.

The first graph shows the quarterly Case-Shiller National Index SA (through Q1 2012), and the monthly Case-Shiller Composite 20 SA and CoreLogic House Price Indexes (through April) in nominal terms as reported.

In nominal terms, the Case-Shiller National index (SA) is back to Q4 2002 levels, and even with the recent small increase, the Case-Shiller Composite 20 Index (SA) is back to March 2003 levels, and the CoreLogic index (NSA) is back to May 2003.

Real House Prices

The second graph shows the same three indexes in real terms (adjusted for inflation using CPI less Shelter). Note: some people use other inflation measures to adjust for real prices.

In real terms, the National index is back to Q4 1998 levels, the Composite 20 index is back to March 2000, and the CoreLogic index back to February 2000.

As we've discussed before, in real terms, all of the appreciation in the '00s is gone.

Price-to-Rent

In October 2004, Fed economist John Krainer and researcher Chishen Wei wrote a Fed letter on price to rent ratios: House Prices and Fundamental Value. Kainer and Wei presented a price-to-rent ratio using the OFHEO house price index and the Owners' Equivalent Rent (OER) from the BLS.

Here is a similar graph using the Case-Shiller National, Composite 20 and CoreLogic House Price Indexes.

This graph shows the price to rent ratio (January 1998 = 1.0).

On a price-to-rent basis, the Case-Shiller National index is back to Q4 1998 levels, the Composite 20 index is back to March 2000 levels, and the CoreLogic index is back to April 2000.

In real terms - and as a price-to-rent ratio - prices are mostly back to late 1990s or early 2000 levels.

Data through April 2012, released today by S&P Indices for its S&P/CaseShiller Home Price Indices ... showed that on average home prices increased 1.3% in the month of April for both the 10- and 20-City Composites. This comes after seven consecutive months of falling home prices as measured by both indices.

April’s data indicate that on an annual basis home prices fell by 2.2% for the 10-City Composite and by 1.9% for the 20-City Composites, versus April 2011. While still negative, this is an improvement over the annual rates of -2.9% and -2.6% recorded for the month of March 2012. Both Composites and 18 of the 20 MSAs saw increases in annual returns in April compared to those published for March; only Detroit and New York fared worse in April ...
...
“With April 2012 data, we finally saw some rising home prices,” says David M. Blitzer, Chairman of the Index Committee at S&P Indices. “On a monthly basis, 19 of the 20 MSAs and both Composites rose in April over March. Detroit was the only city that saw prices fall, down 3.6%. In addition, 18 of the 20 MSAs and both Composites saw better annual rates of return. It has been a long time since we enjoyed such broadbased gains. While one month does not make a trend, particularly during seasonally strong buying months, the combination of rising positive monthly index levels and improving annual returns is a good sign.

Click on graph for larger image.

The first graph shows the nominal seasonally adjusted Composite 10 and Composite 20 indices (the Composite 20 was started in January 2000).

The Composite 10 index is off 33.3% from the peak, and up 0.7% in April (SA). The Composite 10 is up from the post bubble low set in March, Not Seasonally Adjusted (NSA).

The Composite 20 index is off 33.0% from the peak, and up 0.7% (SA) in April. The Composite 20 is also up from the post-bubble low set in March (NSA).

The second graph shows the Year over year change in both indices.

The Composite 10 SA is down 2.2% compared to April 2011.

The Composite 20 SA is down 1.9% compared to April 2011. This was a smaller year-over-year decline for both indexes than in March.

The third graph shows the price declines from the peak for each city included in S&P/Case-Shiller indices.

Prices increased (SA) in 17 of the 20 Case-Shiller cities in April seasonally adjusted (18 cities increased NSA). Prices in Las Vegas are off 61.1% from the peak, and prices in Dallas only off 6.2% from the peak. Note that the red column (cumulative decline through April 2012) is the lowest for only a couple of cities.

This was better than the consensus forecast, and the NSA indexes are above the post-bubble lows set last month (NSA). I'll have more on prices later.

The European Union would gain far-reaching powers to rewrite national budgets for eurozone countries that breach debt and deficit rules under proposals likely to be discussed at a summit this week, according to a draft report seen by the Financial Times.

The proposals are part of an ambitious plan to turn the eurozone into a closer fiscal union ...Excerpt with permission

• At 9:00 AM ET, S&P/Case-Shiller House Price Index for April will be released. The consensus is for a 2.3% decrease year-over-year in Composite 20 prices (NSA) in April. I think the year-over-year decline will be smaller than the consensus.

• At 10:00 AM, The Conference Board's consumer confidence index for June will be released. The consensus is for a decrease to 63.5 from 64.9 last month.

• Also at 10:00 AM, the Richmond Fed Survey of Manufacturing Activity for June will be released. The consensus is for an increase to 5 for this survey from 4 in May (above zero is expansion). So far the NY Fed (Empire State) and Philly Fed surveys were lower than expected, but the Dallas Fed survey was above expectations.

On Friday I posted Zillow's forecasts for the April Case-Shiller indexes to be released tomorrow. The year-over-year (YoY) decline in Case-Shiller prices has been getting smaller all year, and the Zillow forecast suggests the YoY decline will be smaller still in April - and be the smallest YoY decline since the expiration of the housing tax credit.

This raises the question: When will the Case-Shiller indexes turn positive year-over-year?

I looked at the recent improvement in prices (comparing the month-to-month changes for the NSA index to last year). At the current pace of improvement, it looks like the YoY change will turn positive in either the August or September reports.

It is important to remember that most of the sales that will be included in the August report have already been signed. The August Case-Shiller report will be a 3 month average of closing prices for June, July and August - and the contracts are usually signed 45 to 60 days before closing. So just about all of the contracts that will close in July have been signed, and probably many of the contracts that will close in August have already been signed.

Here is a graph of the YoY change in the Case-Shiller Composite 10 and 20 indexes. In March, the indexes were down 2.8% and 2.6%, respectively.

Zillow is forecasting the Composite 10 index will be down 2.4% YoY in April, and the Composite 20 index will be down 1.9%.

Earlier this year, when I argued prices were near the bottom for the Not Seasonally Adjusted (NSA) repeat sales indexes, I thought the year-over-year change would turn positive late this year or early in 2013. Right now it looks like August or September of this year.

Texas factory activity surged in June, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, rose from 5.5 to 15.5, posting its strongest reading in 15 months.

Other measures of current manufacturing conditions also indicated strengthening activity in June. The new orders index rose to 7.9, following three readings around zero, suggesting demand finally grew after staying flat since February. ... The general business activity index had been negative in April and May but increased to 5.8 this month.
...
Labor market indicators reflected stronger labor demand growth and steady workweeks. Employment grew at a faster pace in June, with the index rising from 8.5 to 13.7. Twenty-one percent of firms reported hiring new workers, while 8 percent reported layoffs. The hours worked index was 1, suggesting little change in workweek length.

This was above expectations of a zero reading for the general business activity index.

There are two more regional surveys to be released this week, and the ISM index for June will be released Monday, July 2nd.

After the existing home sales report for May was released last week, I saw several cautionary comments focused on the decline in sales in May (from 4.62 million in April to 4.55 million in May). The key number in the existing home sales report is not sales, but inventory. It is visible inventory that impacts prices (although the "shadow" inventory will keep prices from rising).

When we look at sales for existing homes, the focus should be on the composition between conventional and distressed. Total sales are probably close to the normal level of turnover, but the composition of sales is far from normal - sales are still heavily distressed sales. Over time, existing home sales will probably settle around 5 million per year, but the percentage of distressed sales will eventually decline. Those looking at the number of existing home sales for a recovery in housing are looking at the wrong number. Look at inventory and the percent of conventional sales.

However, for the new home sales report, the key number is sales! An increase in sales adds to both GDP and employment (completed inventory is at record lows, so any increase in sales will translate to more single family starts).

It might be hard to believe, but earlier this year there was a debate on whether housing had bottomed. That debate is over - clearly new home sales have bottomed – and the debate is now about the strength of the recovery. Although sales are still historically very weak, sales are up 35% from the low, and up about 24% from the May 2010 through September 2011 average.

Some people think housing will recover rapidly to the 1.2+ million rate we saw in 2004 and 2005. I think that is incorrect for two reasons. First, I think the recovery will be sluggish - 2012 will probably be the third worst year ever. Second, the 1.2 million in annual sales was due to an increasing homeownership rate and speculative buying. With a stable homeownerhip rate, and little speculative buying, sales will probably only rise to around 800 thousand at full recovery.

With existing home sales around 5 million per year, and new home sales around 800 thousand per year, the “distressing gap” in the graph below will be closed.

Click on graph for larger image in graph gallery.

This "distressing gap" graph that shows existing home sales (left axis) and new home sales (right axis) through May. This graph starts in 1994, but the relationship has been fairly steady back to the '60s.

Following the housing bubble and bust, the "distressing gap" appeared mostly because of distressed sales. The flood of distressed sales has kept existing home sales elevated, and depressed new home sales since builders haven't been able to compete with the low prices of all the foreclosed properties.

This gap will eventually close, but it will probably take a number of years.

Note: Existing home sales are counted when transactions are closed, and new home sales are counted when contracts are signed. So the timing of sales is different.

The Census Bureau reports New Home Sales in May were at a seasonally adjusted annual rate (SAAR) of 369 thousand. This was up from 343 thousand SAAR in April. Sales in February and March were revised up.

The first graph shows New Home Sales vs. recessions since 1963. The dashed line is the current sales rate.

Sales of new single-family houses in May 2012 were at a seasonally adjusted annual rate of 369,000 ... 7.6 percent above the revised April rate of 343,000 and is 19.8 percent above the May 2011 estimate of 308,000.

Click on graph for larger image in graph gallery.

The second graph shows New Home Months of Supply.

Months of supply decreased to 4.7 in May from 5.0 in April.

The all time record was 12.1 months of supply in January 2009.

This is now in the normal range (less than 6 months supply is normal).

The seasonally adjusted estimate of new houses for sale at the end of May was 145,000. This represents a supply of 4.7 months at the current sales rate.

"A house is considered for sale when a permit to build has been issued in permit-issuing places or work has begun on the footings or foundation in nonpermit areas and a sales contract has not been signed nor a deposit accepted."

Starting in 1973 the Census Bureau broke this down into three categories: Not Started, Under Construction, and Completed.

This graph shows the three categories of inventory starting in 1973.

The inventory of completed homes for sale was at a record low 43,000 units in May. The combined total of completed and under construction is at the lowest level since this series started.

In May 2012 (red column), 35 thousand new homes were sold (NSA). Last year only 28 thousand homes were sold in May. This was the fourth weakest May since this data has been tracked. The high for May was 120 thousand in 2005.

Even though sales are still very low, new home sales have clearly bottomed. New home sales have averaged 353 thousand SAAR over the first 5 months of 2012, after averaging under 300 thousand for the previous 18 months. All of the recent revisions have been up too.
This was a very solid report and above the consensus forecast.

Led by declines in production-related indicators, the Chicago Fed National
Activity Index (CFNAI) decreased to –0.45 in May from +0.08 in April. ...

The index’s three-month moving average, CFNAI-MA3, decreased from –0.13 in April to –0.34 in May—its third consecutive reading below zero and its lowest value since June 2011. May’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. The economic growth reflected in this level of the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.

A zero value for the index indicates that the national economy is expanding at its historical trend rate of growth; negative values indicate below-average growth; and positive values indicate above-average growth.